Abstract:&nbspEstimating the response of asset prices to changes in monetary policy is
complicated by the endogeneity of policy decisions and the fact that both
interest rates and asset prices react to numerous other variables. This paper
develops a new estimator that is based on the heteroskedasticity that
exists in high frequency data. We show that the response of asset prices
to changes in monetary policy can be identified based on the increase in
the variance of policy shocks that occurs on days of FOMC meetings and of
the Chairman's semi-annual monetary policy testimony to Congress. The
identification approach employed requires a much weaker set of assumptions
than needed under the "event-study" approach that is typically used in this
context. The results indicate that an increase in short-term interest rates
results in a decline in stock prices and in an upward shift in the yield
curve that becomes smaller at longer maturities.